Hormel Foods (HRL 1.05%), with 55 years of annual increases under its belt, doesn't operate like your typical packaged-food maker. The company's unique system was a major headwind during the pandemic-driven shutdowns in 2020. But as the world is starting to reopen again, that difference has already turned into a tailwind. And the benefits aren't over yet. Here's a quick look at what Hormel does differently and why it's set to boost earnings in the quarters ahead.
Going direct
Hormel is probably best known for its branded-product portfolio, which includes icons like Spam and Skippy. Those are just two of a long list of leading names that can be found across the grocery store. Though it has a heavy focus on protein-related products, the company manages a collection of separate brand-name products. That's worked out fairly well for investors over time; the average annual dividend increase over the past decade was a huge 15%. Looking at that a different way, in 2010 Hormel's full-year dividend was $0.21 per share. In 2020 it was $0.93 per share. That's the magic of compounding.
Image source: Getty Images.
A key piece of the company's success, meanwhile, has been a balanced portfolio. That includes both the products it offers and the segments into which it sells. For example, the recent acquisition of Planters from Kraft Heinz added not just the famous peanut brand but also a larger exposure to convenience stores. That doubled up the diversification benefit. But one of the more notable differences between Hormel and most of its peers is that Hormel has a direct-sales staff dedicated to the foodservice industry. Essentially, it has employees who work directly with restaurants and other food locations, like schools and hotels, to promote its products. It even has brands, like Burke and Cafe H, that are only sold into the foodservice space.
Prior to the coronavirus pandemic, having this direct connection with foodservice customers provided valuable feedback for Hormel that allowed it to differentiate its products. For example, it developed a high-quality, pre-cooked bacon product (Bacon 1) so that the foodservice space could avoid the time, risk, and expense of cooking greasy bacon. But as restaurants and other out-of-home eating locations were shut down in 2020, this business was a major liability. As recently as the fiscal first quarter of 2021, which ended Jan. 24, foodservice segment sales were down by 17%.
That was then, this is now
That's just one sales avenue for Hormel, with its other business benefiting from more at-home consumption. In that same quarter, U.S. retail sales were up 13%, deli sales increased 7%, and international sales (heavily centered on China) advanced 9%. That left the foodservice business the real standout in a pretty bad way. In the fiscal second quarter, however, foodservice turned around, with sales up 28%.
To be fair, that was off a low base, given the pandemic, but it more than offset the flat performance during the quarter in the U.S. retail segment (deli and international both saw continued growth). But the really interesting thing here is that compared to the same quarter in 2019, Hormel's foodservice sales were up 1%. So the business not only rebounded from the 2020 hit, it grew just a touch over the two-year period. During Hormel's fiscal second-quarter 2021 earnings conference call, CEO James Snee noted:
We have a very positive outlook on the foodservice business, as we head into the second half of the year. We are well-positioned from an inventory and capacity standpoint to meet the demand from our distributor partners and operators and are confident in our ability to gain share throughout the recovery.
When pressed by an analyst on the matter, CFO James Sheehan added:
Now for us where we see future opportunities in a number of our segments, we haven't seen lodging come back. We really haven't seen college and university fully come back, which is a big part of our Hormel foodservice business. I referenced K-12 for the Jennie-O foodservice business. So, there's still a lot of dynamics at play. And so even as these other segments, these other channels really start to reopen those are going to have a favorable impact on our foodservice business as well.
Put simply, the company's foodservice business is already back to pre-pandemic levels, and it's not even firing on all cylinders. As the reopening continues to move forward, Hormel's foodservice business looks like it will become an increasingly important growth engine.
The big takeaway
As the pandemic raged, Hormel's foodservice business was a drag that left it trailing packaged-food peers with a heavier focus on grocery stores. Now, however, it looks like Hormel is set to get a big benefit that other packaged-food makers won't as the foodservice channel comes back to life. Make sure you pay close attention to this business when Hormel next reports earnings; it should make for good reading. Indeed, Hormel isn't exactly your normal food maker, but that looks like it will be a very good thing in the quarters ahead.
